Is E-Trade the odd man out in the online broker world?

The online brokerage world changed dramatically last year after every major firm eliminated commissions and powerhouses Charles Schwab and TD Ameritrade announced a merger.

Now investors are wondering: where that leaves E-Trade?

E-Trade, which reported its fourth quarter earnings after the closing bell Thursday, now must figure out how to make up that chunk of revenue that evaporated.

It won’t be easy. Earnings per share fell nearly 30% from a year ago — worse than Wall Street’s forecasts.

Overall revenue was down 8%, but that was not as bad as analysts were expecting. Still, commissions revenue plunged 54% from the same period last year.

E-Trade, like nearly all its rivals, went to a $0 commission model for online trades last year. The rise of popular apps like Robinhood that offer free trades made this move inevitable.

The hope is to attract more customers and get them to trade more, as in making it up on volume. It’s unclear if that strategy will work.

TD Ameritrade noted in its earnings report earlier this week that “trading was very strong” in its latest quarter, with an average of 1 million trades per day, a record. And the company said it’s off to a hot start in 2020, with volume up about 40% to an average of 1.4 million daily trades.

That comes at a cost. TD Ameritrade also reported a nearly 15% drop in overall revenue for the fourth quarter as revenue from transaction fees plunged 43%.

Clearly, the move to $0 is hurting TD Ameritrade, at least in the short-term. Some have argued that eliminating commissions made the firm’s $26 billion merger with Schwab inevitable — a last ditch effort to stay competitive by partnering with a larger rival.

Interactive Brokers, the firm that kicked off the move to $0 commissions last year before Schwab, TD Ameritrade and E-Trade did the same, is also struggling in the commission-free era. It reported an 18% drop in commissions revenue when it released results after the closing bell Tuesday.

Shares of Interactive Brokers fell more than 3% Wednesday on the news and was down another 1% Thursday.

E-Trade could be attractive takeover target

E-Trade’s stock dropped nearly 2% Thursday. The stock was hit hard in early October as the whole industry announced the shift to a $0 commission model.

The company’s shares have rebounded from that pullback and are actually up more than 30% from the 52-week low they hit last fall.

Part of that is due to takeover speculation, said Devin Ryan, an analyst with JMP Securities. In an interview with CNN Business, Ryan said that E-Trade could be an attractive fit for a larger financial firm.

There has been chatter about the possibility that Wall Street powerhouses Goldman Sachs or Morgan Stanley, which have stepped up their efforts to attract more average retail investors and not just the super wealthy, could be interested in E-Trade.

Ryan added that he wouldn’t rule out an eventual acquisition of E-Trade by Schwab after its merger integration with TD Ameritrade is complete.

E-Trade CEO Michael Pizzi has been coy about a potential merger, which has helped fuel the chatter.

In a conference call with analysts after E-Trade’s last earnings report in October, Pizzi said that “we are always open to look at transactions that will deliver more value for our shareholders than sort of a stand-alone performance of our business.”

Pizzi added in the call that “we’re well aware that a possible combination or alternatives could accelerate shareholder value. If that’s the case, we remain open really to all discussions, as we always have been.”

So it seems as if investors are betting that a takeover may be inevitable. But JMP Securities’ Ryan isn’t so sure.

“E-Trade still has an optimistic path forward as an independent company,” Ryan said. He pointed out that even though trading is now a commodity, E-Trade has other lucrative businesses that set it apart.

Ryan noted that about a quarter of the company’s accounts are in its corporate services division, helping to set up stock plans for big public companies. That should help soften the blow from $0 commissions.